Similarities between the Irish and Australian economies raise the question whether the Irish economic crisis could happen here, according to a research paper “How Irish is Australia?” from Tyndall Investments.
The paper looks at the similarities between the pre-global financial crisis (GFC) Irish and the current Australian economies and financial sectors, including a banking system dominated by four strong banks, a booming property market, and an economy that has grown significantly over a short time.
The author of the paper, Dr John Sorrell, Tyndall’s head of credit, says that, while the Australian economy is considerably more robust and diversified than Ireland’s, the systemic exposure to banking has noticeable parallels, suggesting that complacency about Australia’s economic strength may be tested.
“Australia weathered the GFC better than most thanks to a number of factors, but if these factors reverse – as could conceivably happen – Australia’s safe haven status could be dented.”
Dr Sorrell said that, of all the European economies that have experienced difficulties as a result of the GFC, Ireland stands out to Australians because of its banking system’s similarity to Australia’s, with a small set of major banks very focused on the domestic market.
“Like Australia, Ireland has a handful of major banks, and both the Australian and Irish governments moved quickly in the latter half of 2008 to guarantee their banking systems, a move designed to shore up confidence. In Ireland, however, the result was a loss of faith in the credit-worthiness of the banks, and in senior bank paper.
“Fortunately, Australia has escaped this situation, in a large part thanks to the broader diversification of its loan books. Unlike Irish banks, Australian banks have had a broader range of assets with much of corporate Australia traditionally relying on bank loans.”
Dr Sorrell said that another area of similarity between Ireland and Australia is the property market, with house prices in Ireland more than doubling between 2000 and 2006.
“Although Australian house prices increased at a slightly lower rate than in Ireland before the GFC, they have continued to increase and there is talk that we are now in a property bubble.”
Dr Sorrell said that fortunately, there are also important areas of difference between the two countries.
“A major one is currency – unlike Ireland, which is part of the euro zone, Australia has its own currency, which means it has more levers at its disposal to control economic issue.
“While being part of the euro zone can work in Ireland’s favour (as it places a strong incentive on other members to find a solution for its problems) it does limit the strategies Ireland can use to stimulate the economy and manage debt.
“Another area of difference is the economic basis for growth. Ireland is an agricultural producer that reinvented itself as a ‘knowledge centre’. In Australia, agriculture remains a main export earner but also commodities are a dominant earner.
“In addition, Australia benefits from its proximity to Asia which continues to have strong demand for commodities.
“The potential concern is that Australia is exposed to a downturn in demand for agriculture and commodities. So while Australia is unlikely to go down the same path as Ireland, this doesn’t mean that Australia is invulnerable.
“Investors should remain aware that situations can change and today’s financial darling can easily become tomorrow’s problem child,” Dr Sorrell said.
“How Irish is Australia?” is available from www.tyndall.com.au
Tyndall Investments Australia offers Australian equities and Australian and global fixed interest funds to retail and institutional investors in Australia. It has over A$22 billion in funds under management (as at 28 February 2011). Tyndall Investments is a wholly owned subsidiary of Nikko Asset Management Co., Ltd., one of the largest asset management companies in Japan with approximately A$125 billion in funds under management (as at 28 February 2011).
For more information please contact:
John Sorrell – 02 8275 6650